By Dipika Chawla
Smallholder farmers in developing countries can see that adopting sustainable best practices and earning Rainforest Alliance certification will lead to benefits such as higher prices, increased efficiency, and access to stronger markets. However, the financial investment that certification entails can pose a significant obstacle for farmers with limited access to financing. The Rainforest Alliance’s Sustainable Finance program aims to address this challenge by helping small and medium-sized enterprises (SMEs) access funding from financial institutions.
The program is currently focused on sustainable agriculture and forestry, but will eventually address the needs of tourism businesses as well. We spoke with Michelle Buckles, the Rainforest Alliance’s director of Sustainable Finance, who envisions a global strategy that she believes will greatly increase the number of SMEs that are able to conserve biodiversity, improve their livelihoods, and achieve sustainability.
Question: What problems faced by small and medium-sized enterprises is this project aiming to solve?
Buckles: SMEs that hope to obtain certification may need to make a number of investments, such as increasing pay for workers, building waste management systems, improving worker safety, and installing new technology to conserve water on their farms. Small cooperatives rarely have that kind of money sitting in the bank, and need to borrow the capital to make these investments. It’s not easy for smallholder farmers to obtain loans by themselves, so by helping them access the financing they need, we hope to attract and retain producers in the Rainforest Alliance certification system and distinguish ourselves from other certification bodies.
The cornerstone to our approach is creating linkages between SMEs and potential finance providers. These include various types of financial institutions including social finance organizations like Root Capital and Oiko Credit, multinational financial institutions like the International Finance Corporation and the Inter-American Development Bank, commercial and local banks, and insurance providers. We are encouraging the financial community to consider sustainability more in their activities and talking to them about which crops, countries, and types of loans they’re interested in for their portfolios. We identify what types of financing groups need and what opportunities they’d be a good match for, depending on the lenders’ criteria, and then support groups during the application process.
Q: Why do farmers have such a hard time gaining access to finance?
Buckles: SMEs and farmer cooperatives often lack credit history and collateral, so they are not optimal candidates for traditional loans. Moreover, agriculture is considered particularly risky in the lending arena, as crop unreliability, unpredictable weather, and fluctuating prices present risks that can’t be fully hedged against. In addition, smallholder farmers may lack strong business and financial management skills.
Financial institutions appreciate our work because we are seen as a risk mitigator, so to speak, when it comes to financing agricultural businesses. Smallholders who manage Rainforest Alliance Certified™ farms are more desirable candidates for loans than non-certified farmers for several reasons. First, certified farms are sustainable, and many social finance lenders have sustainability requirements for their portfolios. Second, Rainforest Alliance Certified farmers have greater market access because we spend a lot of time developing corporate relationships and generating consumer demand for certified products. Finally, the certification process itself involves technical and businesses management training as well as periodical audits, all of which makes for more reliable creditors.
Q: What types of financing do farmers need?
Buckles: There are two types of financing: short-term and long-term. Short-term financing includes money for inputs like fertilizer and small equipment, working capital for day-to-day costs, and trade finance, which is money used to secure product for export. Long-term financing, also known as investment capital, are loans generally between one and five years that are used for larger purchases such as waste and water treatment facilities, irrigation systems, new crops, and machinery for mulching.
Short-term trade finance is a good option for established cooperatives that already have sales contracts. The sales contract is normally used as collateral, and the loan is usually about 60% of the value of the contract. This is known as the “gateway to credit,” as groups can then leverage their history with short-term trade finance to apply for more loans.
Q: What’s next for the Sustainable Finance program?
Buckles: We’ve been developing a global strategy, testing tools and models, and implementing pilot projects with the aim of expanding and scaling over time. For now, we’re working with cocoa and coffee farmers in eight focus countries — Guatemala, Peru, Colombia, Côte d’Ivoire, Ghana, Kenya, Indonesia, and Vietnam — with plans to expand to other crops and countries in the future.
We’ve already conducted a farmer bankability metric study, which assessed the credit readiness of farmers in Colombia and Peru. That research will be published in June. This year, we’ll start linking groups in our eight focus countries to trade finance providers. We’re identifying groups that already have financing and those that need additional financing, and hope to work with up to six social finance providers.
Another pilot project will create a financial model for cocoa investment loans in Ghana. And in May, we’ll begin training financial institutions, starting with Root Capital, on incorporating sustainability standards into their application process so that they can recognize best practices that will minimize their risk as lenders.
We’ve already started training Rainforest Alliance staff and partners who work with farmers in the field on how to identify financial needs and assess basic credit worthiness. We conducted one training event in December 2012 in Guatemala, and we plan to do another one in July in East Africa.
Q. What are your plans as this program develops?
Buckles: For now, we’re focusing on farmer cooperatives because their transaction sizes are larger than individual farmers and giving them loans is more cost-efficient. In the future, we hope to address the needs of individual farmers as well, particularly for investment capital. We also hope to develop programs to increase financial literacy and women’s involvement in financial management.
Over time, the Sustainable Finance program will expand to encompass all of the Rainforest Alliance’s activities, including our work in climate change, sustainable forestry, and sustainable tourism. Our goal is make sustainability as attractive and feasible as possible to as many businesses as possible by offering them a full, robust suite of technical support.